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March 23, 2023
Positively Dreadful
Came In Like A Teching Ball

In This Episode

Silicon Valley Bank failed and it remains to be seen what unintended consequences we may have unleashed by bailing it out. What’s clear, though, is that SVB’s risk exposure could probably have been detected and its failure prevented, and SVB’s richest, most powerful depositors tried to whip up a broader banking panic in order to build pressure on the government to save them from their poor decisions. They warned of everything up to civilizational collapse if the government didn’t announce that they’d be held harmless. And they got exactly what they wanted, with no strings attached, no new regulation, no new legislation, no symbolic tax on their standing in public life. They’ve gone right back to pretending to be masters of the universe, and they grow seemingly more enthralled with fascist politics every day, as if the Democratic government didn’t just bail them out. Economist Dean Baker joins host Brian Beutler to discuss the stakes of the bail out, and if economics can account for the moral hazard of caving to demands of extremely powerful political activists, openly allied with the political right, who threaten to break the system if they don’t get their way.







Brian Beutler: Hello and welcome to Positively Dreadful. With me your host, Brian Beutler. I joked about this recently last episode, actually. But let’s for real talk about Silicon Valley Bank. Why it failed. Why it got bailed out. What unintended consequences we may have unleashed by bailing it out and whether this is a big snafu or a small one. So my basic understanding of what happened is that there were three regional bank failures, more or less simultaneously. Two of them Silvergate and Signature Bank. We’ve kind of collectively agreed to to shrug off because those banks blew themselves up with reckless cryptocurrency investments. Silicon Valley Bank sucked up all the attention because its depositors and creditors included tons of tech startups and the venture capitalists that fund them. And it failed by overinvesting in long term government bonds, which, to the untrained ear sounds like it should be a pretty safe investment. But then we experienced inflation. The Fed hiked short term interest rates. It reduced the value of the long term bonds. SVB then developed liquidity problems, which it tried to solve by selling assets and borrowing money, and then bam. Peter Thiel and other institutional clients triggered a run on the bank and that was the end of that. At least I think that’s what happened. If I’m wrong, I’m pretty sure my guest today will set me straight. But a few other things happened on the way to the bailout, which the government announced just a few days after SVB entered receivership. One is that in 2018, under Donald Trump, the Republican controlled Congress, with some help from Democrats, deregulated this very class of so-called mid-sized or regional banks at those banks behest, SVB’s risk exposure would probably have been detected and its failure prevented if Congress had just let well enough alone. The second thing is that in the four day lag between the bank run and the bailout, SVB’s richest, most powerful depositors tried to whip up a broader banking panic in order to build pressure on the government to make them completely whole. So normally what happens when a bank fails is that the government, in the form of FDIC, comes in and takes over, deposits up to $250,000 are guaranteed no matter what, and then uninsured deposits get reimbursed at least partially as the bank’s assets get sold off. But that wasn’t good enough for these guys who warned of everything up to civilizational collapse if the government didn’t announce that, they’d be held harmless. So lay my cards on the table. These are not my favorite people in the world. They also, in my mind, have huge credibility problems. Right. Think of all the grifting and scams that this cohort has advanced or fallen for over the years, from to Theranos to the Hyperloop and the Metaverse. And. And you’ll kind of understand what I’m getting at. But it worked. They got exactly what they wanted. And it looks like they got it with no strings attached, no new regulation, no new legislation, no symbolic tax on their standing in public life. They go right back to pretending to be masters of the universe, and they grow seemingly more enthralled with fascist politics, as if the government didn’t just bail them out. And I should acknowledge, as far as I know, that it may have been the right call. Even after the Fed’s move to backstop SVB other banks became insolvent. So there really do seem to have been ripple effects from what happened at SVB. Maybe it would have been worse if if David Sacks and his friends had lost a lot of money. But I think it’s important to understand what was at stake, because the more at stake, the more reasonable a bailout might seem and the less at stake, the worse it is to surrender to these kinds of characters. And so that’s why I wanted to talk to Dean Baker. Dean’s been someone I’ve turned to dozens and dozens of times over the past 15 years, in large part because when I was a very green journalist, he was one of the few economists who’d anticipated the bursting of the housing bubble and the ensuing financial crisis, and he had the receipts to prove it. He was writing about it all along, and he has a way of explaining these things that isn’t just for other specialists. He’s also an unsparing critic of the mainstream press, which has a real blind spot with its own innumeracy. So hopefully he can give us a better sense of whether we’d be better off if the SVB bailout hadn’t happened, and maybe whether economics can account for the moral hazard of bailing out people who aren’t just big national financial actors, but extremely powerful political activists who are increasingly openly allied with the political right. So, Dean Baker, welcome to Positively Dreadful. 


Dean Baker: Hi Brian, thanks for having me on. 


Brian Beutler: So did I explain all of that okay? 


Dean Baker: Yeah, I think you do a great job. You’ve really hit pretty much all the main points. So I don’t know what I have to say [laughter] but no, I mean, that is the basic story that you had a bank that was acting irresponsibly. I don’t know what its management was doing and they should have recognized the problems. The regulators should have recognized the problems. And apparently they did. They didn’t act quickly, but they did recognize that we’ll find out more, presumably down the road why they didn’t take any stronger steps. And you’re entirely right about the 2018 deregulation weakened the oversight quite explicitly. I mean, there’s not really an ambiguity, Silicon Valley Bank was in the category of over 50 billion in assets, would have been subject to strict scrutiny prior to 2018. And the purpose of the law was to say, okay, we don’t have to do strict scrutiny. They raised the the floor there to 250 billion, which SVB was still below. So that was you know a big part of the story. And then you have the situation where under the law, FDIC guarantees everything under 250,000. And then after that, it you’ll see I mean, you know, people are talking about this we’ll come back to it, but they’re talking about like, oh, they’re not going to get anything, which was nonsense. It was it would have been important to understand that. But then you had the David Sacks, among others, Peter Thiel, a number of big tech billionaires running around saying world will end if we don’t get our money. And end of the day, they did get their money. President Biden and the Fed, they made sure that everyone’s going to get their 100%. And yeah, I mean, it’s debatable. You know, we can go into that in a minute, you know, as to whether it was necessary at the point that they did it. But they, we we’re in an odd situation now where basically I think most people would reasonably work on the assumption their deposits are guaranteed in full. Even thought the law was just up to 250,000. And that’s a problem. 


Brian Beutler: I want to get to that specific issue about incentives in a minute. But on a more rudimentary level, I think a lot of people. Sort of feel like investing in Treasuries is extremely safe. You know, so long as the U.S. government itself isn’t teetering on the edge of collapse, in which case, you know, regional bank failures would be the least of our problems. So can you can you help our listeners who who have that instinctual sense understand why it is that in this case, SVB’s bond holdings were actually quite risky? 


Dean Baker: Yeah, it is amazing. And I’ll say I’ve seen investment advisors saying in news articles or whatever, say, oh, Treasuries are completely safe and it’s just not true. And the point here is your interest rate risk. So they are completely safe in the sense that the government’s going to pay its bills. You know, we could imagine an end of the world scenarios where the world blows up and the government won’t pay the bills. I don’t think any of us care about that. We care about the entire world. [laughter] But but but short of that, you know, the government pays its bills. You will get your Treasuries. But the issue here is the value of a longer term Treasury Note, say a ten year, 30 year. That’s going to depend on what interest rates are at a moment in time. Now, if I buy a ten year Treasury bond in 2020 and I’m prepared to hold it to 2030, I’ll get my money back. Typically $1,000 notes, so I’ll get my thousand bucks back. But if I want to sell it on the market this year, next year or the year after, that will depend on current interest rates. So that’s why it’s really infuriating to me when I hear people say, well, there’s no risk. Well, there is a risk. And that’s exactly what happened to Silicon Valley Bank. So we had extraordinarily low interest rates by design. This was you know we had the pandemic. The Fed was trying to boost the economy. It pushed interest rates down as much as they could. So the interest rate on ten year treasuries, in 2020, 2021 was hovering at 1%. That’s really extraordinarily low. I think you’d have to go back to the Depression to see it that low. So what happened? The economy starts to recover. Interest rates do to go up because to that then even more so because the Federal Reserve’s Chair Powell, quite explicitly said we want higher interest rates. You want to try and slow the economy, We’re worried it’s growing too fast. We’re worried about inflation. All this was said. I mean, so now this is like we’re looking you know in the closets and trying to totally public, Powell said we all debated a we meaning myself, economists, policy types. So this good policy is going to fast whatever. But it was quite explicit. We’re going to raise interest rates and immediately they control a short term rate, overnight rates. None of us see that that’s what banks pay, but that’s immediately what they control. But when they raised that, we’re now at 475. I don’t know what the Fed’s doing now as we’re speaking, but they may well reserve another quarter point. But any case, they went from zero with that 475 that pushed up the long term rate of ten year Treasury bonds. That’s what we usually look to as the key rate pushed it up from around 1% to we were up around 4%. So since falling back a little bit to about three and a half percent, that’s the story of the Washington Treasury bond. So when you have a ten year Treasury bond, you bought in 2020 and the interest rate was 1%. And then we come round to 223, it’s up around 4%. Well, it’s going to lose 10 to 15% of its market value. So again, you can still hold it till 230. You get your thousand bucks back. But if you have to sell it today, you’re going to lose ten or 15% on that. And that’s exactly the situation Silicon Valley Bank was in. They had a lot of these long term Treasury bonds. They had to offload some of them because they had to pay money out to their depositors, and they did that at a loss. Then everyone said, oh, my God, they don’t have enough money which taken literally was true if everyone ran up their deposits, they didn’t and that they did run. And that’s when the FDIC stepped in. So that’s the basic story there is. 


Brian Beutler: Is the idea that that if you know, if you’re not if you’re going to sell the bond before it’s fully mature, you have to do it on the market. And there’s no demand in the market for a bond that has a 4% interest rate over the long haul because people can just put their money in short term investments that will return 5%. Is that what’s happening? 


Dean Baker: Well it’s a little different than that. So so Treasury’s issuing bonds every day, well, not really every week that they’re selling bonds all the time. So you’re selling bonds. I’d have to double check what they’re selling this week. They probably are, but they’re selling a ten year Treasury bond this week. It’s going to carry an interest rate, probably three and a half percent because they’ve come down a little bit. So it’s going to say we’re paying three and a half percent. So the way that’s paid and just to be clear, what it’s saying is it’s $1,000 bond, so it’s paying out $35 a year. You know, I believe they make the payments quarterly. I should know that. But but let’s say they make that quarterly, so they pay one quarter that will go 875 every quarter. But so what you’re getting when you get the bond is you’re getting that payment of $35 a year. And then the promise that come when it comes due ten years from now. 2033. Now you get the $4,000 back. So the question that people are asking in the market when they see SVB coming there with these 220 bonds that carry a 1% interest rate, they give you $10 a year. They’re saying how much am I willing to pay for that? Well, if I buy this year’s Treasury bond, the one that Treasury’s just issuing, they’re going to give me $35 a year. So how much am I prepared to pay for bond that gives me just ten a year? Well, clearly less. Now, again, I know if I hold it for now, seven years, 2030, I’ll get that full $1,000 back. But in the meantime, I’m only getting ten a year rather than $35 a year that I’d get on the bond that Treasury is putting out today. So that’s why it sells at a discount. And again, we could calculate the exact amount programs for that second half, second or whatever. But it’s going to be around 10 to 15% less than its face value. 


Brian Beutler: Got it. So to me, this this raises a couple of questions. One is normally you’d expect that, you know, once it became clear that the Fed was on course to raise interest rates. Starting last year that banks like SVB that were over indexed on these long term Treasuries would what, diversify their their holdings so that they wouldn’t be so exposed to that risk? 


Dean Baker: Well, there’s two things they could do. One is diversify it, you know sell off some of those bonds so they don’t have that much. The other is to hedge it. You know, they could buy quote options. That’s ostensibly why those markets exist. So there’s huge options, huge markets in derivatives. And one of the big ones is the options market. And they’re they’re very thick markets options on Treasury bills. So they could buy an option to sell the Treasury bond at, let’s say, $0.95 on the dollar. I mean, depending where we are exactly. So protecting themselves against a really big loss. So they would always have the option. Now that cost them money because they have to pay for the option. So that would reduce their profits, but that would limit their losses. So it’s just like any other type of insurance. You know, we buy insurance in our house because if it burns down, we want, you know, replaced fixed. And assuming it doesn’t, which it doesn’t most, most of the time we’re out the money and in this case it would be the same story that if they if they bought put options that would definitely cut into their profits but would mean that if if interest rates kept rising and the bond prices kept falling, they’d be protected. 


Brian Beutler: If the 2018 legislation had never passed, if Dodd-Frank had been left undamaged by the Republican Congress and Donald Trump in 2018. What would happen? Regulators would have had access to SVB’s books. They would have said you’re exposed to interest rate risk. You need to reduce this risk by buying put options or something in order to make it so that. You’re liquid enough to cover all these deposits. 


Dean Baker: That’s what I would expect. Just to be clear, the Fed was still regulating them, but the law prior to 2018 required strict scrutiny, required stress tests, so closer examination of their books. So they still did have access to them. And again, there are warning letters that have come to light. Again, the Fed’s promising investigation. I hope there’ll be an independent one, but whatever, there will be an investigation. Why did they just do warning letters? But there was a stronger standard in place for banks Silicon Valley’s size prior to 2018. Now, I am going to qualify this that the assumption here is that regulators know what they’re doing [laughter] and not to knock the regulators. But we can’t always assume that. And one of the things I was quite amazed by the one of the specific changes they had in the law was that they would no longer have to do regular stress tests of the bank. And what stress tests is that you put the assets of a bank out on a spreadsheet and you say, okay, you have so much in mortgages, so much in government bonds, so much in loans. What happens to those under a variety of scenarios? So the unemployment rate goes to 10%. So you want bad scenarios? Not absurd. You don’t say you know the end of the world because again, we don’t know yeah, it’s [indistinct] at the end of the world. But you have bad but plausible stor— Scenarios. So the unemployment rate goes to 10%, inflation goes up five percentage points. You’d have a variety of bad scenarios. I had assumed that they would have a big rise in interest rates in there, and apparently the stress tests that they were applying in 221 to 222 did not have that. And I mean, I just find that kind of mind boggling because, you know, interest even if you weren’t expecting a rise in interest rates, the interest rates were very low by historic standards and it’s not debatable. So clearly, one of the things that could happen is they go back to a more normal level. So that wasn’t in their stress test. So I just mentioned that to say surely the regulators should have caught this, but I wouldn’t say it was 100% because, you know, for whatever reason they did the stress test that didn’t include, to my mind, the most obvious, bad thing that would happen. 


Brian Beutler: Is this is this why we think that, you know, there was reporting that Jerome Powell nixed in this joint letter any mention of the idea that the regulators weren’t equipped with the tools they needed to detect the risk at Silicon Valley Bank because of the 2018 law, that basically that’s what Biden and Janet Yellen wanted to say. And Jerome Powell said, I won’t put my name to that. And so they had to take that language out. Is this why? Because because he knows that they actually did have access to this information and could have done something about it. 


Dean Baker: I can’t speak to why what his reasoning was, I mean, to my mind is pretty obviously a regulatory failure. 


Brian Beutler: Yeah. 


Dean Baker: You know what? You know, if you want to say, oh, our regulators are so inept, that wouldn’t have caught if even if they done [indistinct] I wouldn’t want to say that if I were Jerome Powell. Maybe he’s deciding that that’s a better thing to say than the alternative. But they had access to the information they needed. To my view, the biggest difference created by 2018 was it explicitly said that it’s not subject to a strict scrutiny as, say, the largest banks—


Brian Beutler: Right. 


Dean Baker: And you know, again—


Brian Beutler: I guess I just mean, if he knows that this is all going to come out, then he might not want— 


Dean Baker: Oh yeah—


Brian Beutler: Yeah. 


Dean Baker: —I’d have to imagine he knows that. I mean, obviously, he’s a smart guy. [laughs] He knows, you know, you’re not going to be able to keep this secret so. 


Brian Beutler: Right. [both speaking] So maybe maybe there’s some, like, in the end, I’m going to have to own this anyway. Might as well might as well not pretend to blame, you know, Donald Trump or or that law or whatever. [laughs] So here’s a question that stems from my general distrust of that universe of Silicon Valley billionaires. Is there any reason to suspect funny business surrounding the run on SVB? The as I understand it, it it wouldn’t have failed but for Peter Thiel, who’s extremely rich. Silicon Valley right wing lunatic [laughter] telling all of his, you know, A withdrawing most of his deposits and also telling the companies in his portfolio that they should also take their money out and that was enough to collapse the bank. And I think that that raised some suspicions that he might have been playing the other side of that bet. On the other hand, it does seem like all this information was out there suggesting that SVB couldn’t actually cover all of its deposits in the event of a of a bank run. So maybe it’s just reasonable for somebody like him to say, let’s be better safe than sorry and and move our money out of here. 


Dean Baker: Yeah, it’s it’s hard to tell. So you’ve had really unusual situation with SVB in two ways. One, of course, was that it was this bank to all the, you know very concentrated industry. I mean you’ll have that sometimes other places where you have banks that lend to the oil industry in Texas or something and that’s all their customers. And in this case it was the tech sectors. So this is a, I don’t know if tight knit I’m not familiar with, but, you know, they know everyone knows who Peter Thiel is, you know, so so when he gets out there and says, oh yeah, big problems, it’s taken very seriously. The other point here is that it was very, very vulnerable to this sort of run because you had upwards to 90%. I see numbers 95%. I have done the calculation myself. But you had a huge share of its liabilities in the form of uninsured deposits. That’s really extraordinary to have over nine year, even 95%, most banks it’d be 20, 30%, maybe 35%. They have their liabilities they have a larger share. Their liabilities are in deposits under 250,000. They have more bonds. They’ve sold bonds. So those are also liabilities. But if you you have a ten year bond from Silicon Valley Bank and you get worried about it, well, too bad. You know, they they’re not gonna have to pay it for ten years and shorter term notes as well. So they were very susceptible to a run. So it wasn’t it wouldn’t have been unreasonable. You know, I’m thinking I don’t share Mr. Thiel’s, right wing politics. But, you know, if I had been in that situation, I have a lot of money in the bank and I have friends  I might have well done the same thing saying, hey, this doesn’t look good, you know? So do they have some ulterior motive? Was he shorting it? I would be surprised. Not that I think that’s above him, but he’d probably get caught. So. So my guess is that it really was just him saying making reasonable warning that you know this bank could go under. And of course it did. 


Brian Beutler: I guess I just am too much of a amateur at all this to know if that would be illegal. Would that be a form of insider trading to try to trigger a run on the bank that you were shorting? 


Dean Baker: You know, it probably would be, but I think it would be difficult to prove, you know, so the question is stock manipulation is illegal. It’s done. You know, so, you know, if you’re a big actor and you have hundreds of millions, billions of dollars, you can suddenly start buying a lot shares of pretty big company even and move its price. And there tends to there’s this idea of momentum trading. So the idea is that you have a lot of people in the market and they go, oh, you know, this stock’s price just went up 10% last week, must be something good there. So they buy it just because they’ve seen. So they haven’t looked at the company and said, oh, this is a good company, its profits are good. They just see oh the price is going up. I’m going to buy it. And of course goes the other way as well and you know the price falls they are going to sell it. And it would not be difficult for someone to manipulate the market that way. And I’m sure many, many people do. It’s very, very difficult to prove that. So unless you have some document where they’re exchanging notes with someone saying, hey, why don’t we all sell at the same time next Thursday and we’ll push the stock price down and wait for it to go down 10%, then we can buy in at a real good, unless you have someone actually you have written notes saying that it would be very hard to prove. So I’m sure if things like that happened frequently, the ability to prove it is very limited, but it would be illegal if that’s what they’re doing. 


Brian Beutler: Got it. Well. Something interesting for Congress to look into it if it ever decides to give a shit. Okay, so SVB fails. FDIC comes in and takes over. To me, that’s the system working like it’s supposed to. Is there something inadequate about that system or was there something unique about SVB that made the normal resolution authority inadequate? 


Dean Baker: I think the system works pretty well. And here, here I’m going to blame the media law because the reporting on it was incredibly responsible. We got all these news stories, and here I’m talking about the New York Times and National Public Radio, and I’m picking on them because I think of them as the best I’m not picking on Fox News or some small paper out in Iowa or something. These are ostensibly the best news outlets in the country, and they were highlighting this person. I remember NPR, this young woman or middle aged or young to me now. But anyhow, she has her own business and she’s really worried she can’t make payroll because her money was in SVB. Well, I have no idea the size of business or whatever. But the reality was at the time that they announced the closing of the bank, this was the Friday that the bank closed. The FDIC, in its statement, said we’re going to issue an advance payment next week and then we’re going to give you a certificate for the remaining funds. Now, how much would the advance payment be? I don’t know. They didn’t say. Given what I know about its books, it’s very likely had been 60, 70, maybe even 80% of the deposits. So they’d have most of the money in their hand that day. The other part of the story, let’s say it was 70%. They’d give you a certificate for the remaining 30%. So the people are saying, well, I’d have to wait around. You know? No. You get that certificate for the remaining 30%. Their investors are going to buy that from you that day. Now, you won’t get that full 30%. The amount they’re prepared to pay is going to depend on the assessment of what at the end of the day, they think they’ll get. Is it going to be two thirds of it is going to be three quarters is it going to be half so it will be based on that. And then a discount because of uncertainty and might be a month, two months, three months down the road. So you’re not going to get the full amount that the investors are expecting to receive. But the point is they would get most of their money very, very quickly. So the idea that you had all these businesses that won’t be able to meet payroll, that was a lie and that was widely spread. Again, National Public Radio, New York Times and I’m sure other places as well. And that helped to spark the fear that, oh my God, the federal government has to step in because we can’t have all these companies that can’t meet their payroll. And of course, is scared people at other banks that, oh my God, we could be in the same situation and suddenly we can’t meet our payrolls. So I think it was the irresponsible reporting really was a very, very big factor in this story, making it into something much bigger than it might otherwise have been. [music plays]




Brian Beutler: Right and it it sort of worked in harmony, like maybe a bad word to use, but it worked in harmony with what the V.C. guys were doing, which was just screaming in unison to the high heavens that without a bailout, this bank collapse would create a nationwide economic crisis. Right? And, I mean, they had a reason to pretend to believe that, right? Because they were clearly at risk of losing not just their deposits, but investments that they had in firms that might have collapsed if SVB had not been bailed out. So were they just. Those guys just lying in order to try to get their money back?


Dean Baker: You know, I don’t know whether they knew, whether they cared. They were again, I don’t I don’t follow him on Twitter, but he kept showing up Elon Musk, I just thought I wanted to see what he had to say. So I saw David Sacks any number of times saying, oh, this is going to be an economic calamity along we haven’t seen since the Great Depression, this and that. What did he know? Who knows? My guess is he didn’t really care what the truth was. He just wanted to scare spread these scare stories with the idea that’s going to increase the likelihood that he’ll get a full bailout. And in that sense, it worked. So I kept whenever I started my Twitter thread, I always responded by asking him what his view is on student loan debt forgiveness. [laughter] I didn’t get a response, but yeah, you know, so it it was a sight to see these right wing guys suddenly saying the government has to come to our rescue. 


Brian Beutler: Yeah, I mean, everyone went and dug into his Twitter archive and found all the things he tweeted over the years about how, you know, bailed out institutions are corrupt. And here he is kind of admitting to his own corruption in some sense. But I guess I’m interested in that question for a few reasons. But one of them is I want to know or I want to have a better sense of whether the bailout itself was, in essence, just a form of pure capitulation to these guys. Right. Like what? Why couldn’t Biden and or Janet Yellen and or Jay Powell go on TV to just say the overall system is sound, this bank was mismanaged and the people demanding the bailout are not telling the truth about the situation because they don’t want to lose their own poorly invested money. I mean, just diffusing this idea spread by the media and by these V.C. guys that there was imminent economic catastrophe afoot. And saying that they were just misleading people. Could that have forced in and of itself that kind of outward messaging forestalled the need to bail those guys out?


Dean Baker: I think in other times that might have been possible. But given today’s politics, I just don’t think that would’ve been the case. Because you have Republicans, they’d be happy to have the financial panic they see that’s, you know, their best chances for the 2024 election. So they would they would just say, oh, Joe’s smoking something again, Sleepy Joe. You know, they didn’t give him, whatever, you know, the stories they’d say. So I don’t think him saying that would have been able to stem the panic. So so I don’t I really don’t think that was an option. Again, I would love to see that that’s what should have happened. And the yeah I was saying what part of a 250,000 payout cap is hard to understand? These guys are supposed to be wizards of the universe. They can’t figure out that if you have more than 250,000 in the bank, then the FDIC doesn’t guarantee it? I don’t really understand what’s so complicated. But again, given the dynamics and our politics today, I think an effort by by Biden, by Yellen and by Powell to do something on that would have been futile. 


Brian Beutler: All right. I mean, I guess that it’s somewhat exculpatory then as an explanation for why they did it like they thought that their other tools, their communications tools weren’t going to be adequate to to stop people like David Sacks from creating runs on other banks. But that like that draws me into to a series of questions I have about moral hazard. We already alluded to it. I think everyone who lived through the Great Recession is familiar enough with the concept. Basically, the idea is that if the government eliminates the direct consequences of risky behavior, then firms will load up on risk because the upside is very high and suddenly there’s no downside because the government’s got your back, they’ll bail you out. So should should we presume that other regional banks and their investors now believe understand that the government has in essence insured them against. This kind of collapse. And so they’ll just redouble whatever risky practices they have, like whether it’s interest rate risk or cryptocurrency risk or whatever else. 


Dean Baker: Yeah, I think that’s a very real. I mean, it is 100% what we should be worried about. So. The working assumption, I think, of anyone who has a large amount of money in these [indistinct] regional banks or for that matter, the too large to fail banks, they’re operating on the assumption that it’s 100% insured by the federal government. And that form of discipline, market discipline for banks doesn’t exist. So before, at least in principle, to how much they were doing that, I don’t know, at least in principle. I mean, I think I ran I was the co-director of the Center for Economic and Policy Research for 16 years. And we were mindful, I mean, we never had that much over the limit, but we were mindful that our bank, banks can collapse are only guaranteed 250,000. We’re mindful of that. So not that we were looking at it every day, but we’re mindful is this bank okay, this and that. So it is a little amazing to me that someone who has 40 million Roku, the streaming company, has 400, had 400 million, apparently has a venture capitalists at like 3 billion that they didn’t do some basic due diligence. Again, they have financial officers that that that’s their job. So what you would like the market discipline story is that these people who have a lot at stake are reviewing the books of the bank. And if they looked at Silicon Valley books, again, all public information, they don’t need an insider they could’ve seen this bank’s kind of shaky footing. I don’t want 400 million in there. But they weren’t doing that, so why not? I don’t know. But there is supposed to be a form of discipline to limit the extent to which they engage in risky behavior. So you’ve taken that away. And the extreme example there is a little ancient history now I’m dating myself, but the savings and loans, they in 19, while this was actually they were basically bankrupt, most of them in under the Carter administration. And his last year in office he was trying to arrange for a resolution. So you need a lot of money to make the payouts you had to make and you would shut them down. You shut down the bankrupt. To be clear, not every savings account, but a large number were worse interest rate. Yes, that was exactly what did them in at the time. Anyhow, Reagan came into office and he said, well, it might be true that they they’re insolvent, but they’re cash rich, meaning that if I go into the bank and I want $1,000 out of my account they can give it to me. So he said, we’re going to let them work their way out. And what they did was dug the whole thousand times deeper. They did all sorts of incredibly risky things because they had nothing at stake. So it’s a classic case. Why not? I mean, in many cases, it’s outright fraud. But even if it wasn’t outright fraud, you go, oh, someone’s coming to me with this idea about a golf course or a shopping center, this and that. And sure, let’s see if it works, because we don’t our bank’s are basically worthless if we have nothing at stake. And the amount of losses in the S&Ls probably increased tenfold over the course of a decade until you did finally have them resolved. So you have the same sort of story here that if we’re giving 100% deposit insurance. Well, then how do you prevent them from taking risk? The answer should in principle be all right, we’re going to be really careful oversight. But that’s exactly the Republicans are going the other way. And it’s not clear all the Democrats want to go the way of more careful oversight. But that’s the traditional quid pro quo. Okay, fine. We’re going to ensure all the deposits, but then we’re going to sit on you and make sure you’re not doing anything very risky. 


Brian Beutler: Right. So that the the sort of like a carrot and stick. If you if you find yourself in a position where you have to. Do this kind of bailout. The thing you want to do on the other side of it is pass new laws that say that can’t happen again in the event that a situation like this arises. Here’s some new penalties, new rules that these institutions have to follow in order to A, reduce the risk that happens again and B, make clear that no one gets bailed out if it does. Right. 


Dean Baker: Yeah. 


Brian Beutler: And I think, as you alluded to, Republicans are are out there pretending to believe that SVB collapsed because it was just too focused on being woke and not enough on on risk management. And you also alluded to the fact that Democratic leaders don’t seem to want to fight them on that because a few dozen of them voted for the same deregulation in 2018. So in that void, Joe Biden has has proposed these sort of smaller policies. To me, they seem designed to discourage what happened at S&P by by asking Congress to to create a few different ways for FDIC to punish bank executives who run their banks into the ground, claw back bonuses that they award themselves if they ruin their own banks. Is what he’s proposed adequate to reduce this level of moral hazard, whether or not—


Dean Baker: It’s not optimal. But it does go far. So one—


Brian Beutler: Okay. 


Dean Baker: —of the things I found most obscene, both in this case and going back to 2008 and 2009, the executives that ran their banks into the ground walked away, very rich people. So in the case of the Silicon Valley Bank, the CEOs got a 9.9 million. That was in 2021. I don’t know what that’s what’s publicly available. I don’t know what he got for for the most recent year in the case, going back to 2008, 2009, Richard Fuld, the guy, the CEO at Lehman, he made about 300 million over his last five years at the bank. And same thing, the I’m forgetting the guy’s name now he ran Bear Stearns. But he also walked away, I think, it was well, over a hundred million. You know, we have arguments about how much CEOs should get paid. And I’m not going to say any of that are really worth 20, 30, 40 million which many of them get over the course of a year. But you’re very hard pressed to say you’re worth 300 million when you put your bank into bankruptcy. And that’s that, you know, that’s what Biden’s hitting at. You know, so you could say, okay, if you’re putting your bank into bankruptcy, you’re not going to walk away with these big bucks. So I haven’t seen the fine print in terms of how much you would be able to walk away with. I’d like it to be very, very little. I mean, you compare, I did a little graph where it said here’s what a minimum wage worker gets. [laughter] It’s funny, after I did it, I go, did that come in there? And I go, yeah, it’s in there but it was so low relative, you literally couldn’t see it. I double checked it myself, as I said, to make sure it was in there. So it’s just kind of obscene that someone who was clearly whether it was fraud, whether it was foolishness, whatever you want to say, if they took the bank down, they were not doing a good job. They should not walk away with a big chunk of money. 


Brian Beutler: So let’s let’s extend this concept of moral hazard. To the risk that Biden, Yellen, Powell et all. create by rewarding the David Sacks types with a bailout after they basically, you know, abuse their communications tools to sort of bully the government, like give us the bailout or we’re going to cause a national bank run. And then everyone like, see how happy you are then, right? Is it? Proper for economic policymakers to think about those kinds of consequences. Given that now, I mean, now, you know, if if a if a regional bank that serves the oil industry, as you were sort of hypothesizing about a few minutes ago. Went belly up like SVB did. I mean, the the investors in big oil companies are liable to get on Twitter and do the same thing, right? [laughs]


Dean Baker: Yeah. And, you know, it’s a real problem. And, you know, we’ve seen this come up again and again and again. And now that we have social media, they probably have a bigger platform now that these people everyday have a big platform, but an even bigger platform than they did previously. And going back a little bit, not ancient history yet, 2008, 2009. I mean, I frankly, I was against the bailouts. I was one of many economists in my my position here. But they to my view, they they kept saying we’re going to have the second Great Depression. And I kept pressing people how? How? You know, I understand the story that, okay, we have this cascade of bank failures. That would be a real bad situation. There’s no doubt about that. We go, okay, so after we have Bank of America go under and Citigroup and a lot of smaller banks across the country, because clearly that would have happened go, okay, all these banks are under. But we still the FDIC, we still the Federal Reserve Board, we still have the Congress, what prevents us from going out and spending a boatload of money on all sorts of stimulus programs, building roads, building, you know, clean energy. It’s obviously the big thing today. But we could have started on this 12 years ago, 13 years ago. What stops us from doing that and putting people back to work? So I never got an answer on that. I got people yelling at me, calling me names, whatever. But I think they they basically they got this echo chamber. We have to save the financial industry. To my view, it would have been a great thing that we have an incredibly bloated financial sector. We have these people making tens of millions a year. The people under them make millions a year. They aren’t doing anything productive for the economy. From an economic standpoint. We need a financial sector to be clear. I understand, it’s important, but we don’t need the bloated financial sector we have. An efficient financial sector is a small sector. But they got this total echo chamber. It was on again, New York Times, Wall Street Journal, Washington Post, NPR. You couldn’t get away from it. Second Great Depression. I happened to watch. I don’t know. I was watching one of the network news shows. I usually don’t but I happened to. And they had pictures of people in the Depression saying, this is what we’re facing. So they beat this endlessly. And I agree if I really thought that we were going to face the second Great Depression. And not to get technical, ten years of double digit unemployment. That’s what I’m talking about as a depression. Yeah, I’d say bail them out, but I do not believe and I can’t see how that was the case. And as it was, we saved these guys and there was no reason to. 


Brian Beutler: Right they had, they had a bunch of embedded political beliefs about how feasible it would be to pass a second, help me out here, FDR, uh. 


Dean Baker: Stim— New Deal?


Brian Beutler: New Deal. Thank you. [laughter] They had some embedded political beliefs about how feasible would be to to pass another New Deal in the event of all these bank failures. And they, you know. You know, when when when these sort of hivemind things take over, it’s often because people are like, well, my situation is pretty good and I don’t want events surrounding me to upend them. And so, you know, I’m not sure that if you could play the tape in reverse and then rerun it the way you wished it had happened, it is sort of taking a gamble, right? Like the political will was there in the moment to pass a big bailout. You assume that if there was all this political will to do something, that you could have just applied it to passing a multitrillion dollar roads and bridges and clean energy and so on bill. But I guess what the whole notion of we could enter a second Great Depression was sort of premised on the idea that, of course, Congress isn’t going to do something as as progressive as another New Deal. Is that where you think that was coming from? 


Dean Baker: You know, I think a lot of people thought something like that wasn’t the nature of the discussion. So the nature of the discussion was we would be doomed to a second Great Depression because the banks had collapsed. Now, I totally understand. And I think it’s it’s a possibility that we would not have had the political support for that, but that would have been a different level of the debate. I never saw that literally. I never saw that. I mean, some people have said when I raise it that, oh, but, you know, you wouldn’t be able to get Congress to do that. And when the first bailout was before we even elected Congress, I was, of course, when Bush the second Bush was still in the White House. And we hadn’t had the 2008 election yet. So would you have been able, with the new Congress to have had a big stimulus package? I mean really big. I it’s certainly possible you wouldn’t have been able to sell it. But again, that’s a different sort of argument. That’s a political argument, which obviously we have to take seriously because, I mean, if Congress won’t do it, sure, then we will have a very long period of high unemployment and it could rise to the second Great Depression. But that’s very, very different from saying, oh, we will be condemned to a second Great Depression because the banks have failed. 


Brian Beutler: So here’s another politics question. And I think that it’s in the same category of thought experiment that. I realized that at some level we should want policy in general to be implemented on a on a politically neutral basis. Right. But here in the in the SVB scenario and the decision to bail out the people who the specific people who got bailed out were, we weren’t talking about considered policy, like what’s the proper regulation for all regional banks. We’re talking about whether or not the government should have taken extraordinary action to help these specific investors at this one bank. Would it have been reasonable? Would it still be reasonable for for people in Biden’s position, in Janet Yellen’s position, to consider the social consequences of empowering people like Peter Thiel and David Sacks, who, in addition to any other problems you might have with them, are like very powerful people with really radical political ideas that their bailout money is going to be used to fund. Right. 


Dean Baker: I think it’s very reasonable. The question is and they may well do that, but obviously they can’t say that publicly. So, I mean, I think we do have real problems with political power in this country with the rich carrying such a disproportionate influence. And I mean, there’s some you know, I’m mostly happy with George Soros, where he spends his money I haven’t gone through it all and I’m sure there’s things I don’t like, but in any case we’ve occasionally gotten money from him in times past. [laughs] So in any case, I’m not that upset about where he spends his money. But the idea that you have these rich people that have such grossly disproportionate influence on public debate, it’s a real problem. I mean, you mentioned Thiel. The more obvious one is Elon Musk. 


Brian Beutler: Yeah. 


Dean Baker: I mean here he controls Twitter. And it’s just kind of mind boggling to me that and maybe people are concerned, but it’s Twitter has a reach that’s probably ten times as important as I don’t know, whatever he thinks the most important newspaper or mainstream media outlet. He’s got way more and he’s using it. I mean, I said, I’m getting David Sacks because Elon Musk must decided I should get David Sacks. Not because I. I don’t think I ever if you did an algorithm looking at things I want to see, I don’t think I’d ever did anything that would lead you to think I want to hear what David Sacks has to say. So, you know, he’s using his power to promote these right wing views. And I think that’s a huge, huge problem. But again, it’s a little difficult for you, assuming they’re having these discussions in the Biden administration is a little difficult for them to say anything about that publicly. I mean, I think they should be thinking about how do we dilute the power of these people. I mean, I think, you know, again, picking on Twitter and Elon Musk, I think doing something to to break up these, Facebook same story. I mean, Zuckerberg we could have issues with. I don’t think he’s been as pernicious as Musk. But it is is problematic that a single person gets so much control over what people see. 


Brian Beutler: Right. I mean, I don’t want to be in the position, even though I kind of am by mistake proposing that in this case, Democratic policymakers should be doing anything like what Donald Trump did, which is like figuring out ways to abuse power, to hurt political enemies. But, you know, when you’re deciding whether to take extraordinary action, I think it opens up this other door, which is are we rewarding bad behavior by doing something extraordinary and and bad behavior, both in the sense that, like, you know, Peter Thiel is going to try to destroy democracy around the world. Like that’s an important thing to consider or that David Sachs is going to or and people like him, people who want to emulate him, are going to use Twitter or whatever social media tools they have if they find themselves in a pinch to try to get to bully the government into a bailout like it seems to me like the government can actually consider those moral hazards. Consider them just like moral hazards when they’re deciding whether to do something like a bailout that is not nearly as unsure legal footing as simply just letting FDIC do its normal thing, right? 


Dean Baker: Yeah, I think they should consider that. I hope they did. But again, I think it really did get out of hand to the point where they had to act and do the things they did. So. 


Brian Beutler: Okay. 


Dean Baker: If we’re just these guys yelling and screaming that, oh my God, Silicon Valley Bank’s so important to the tech sector. And that was in some of David Sacks tweets, I’m sure I didn’t see all of them, thank God. [laughter] But that was, you know, you’re going to cripple our tech sector, which is 100% crap. But, you know, it would be totally appropriate for them to say we’re not going to give in to this sort of bullying. You know, you’re trying to create this panic and we’re not going to give in to it. But the reality is they succeeded. The panic was real. And I don’t I don’t think there was a way to stop it. So short of what they did, I think they really did have to step in and say, okay, we’re backing everyone up 100%. You don’t have to get your money out of the bank. [music plays]


Brian Beutler: Here’s here’s a similar question I have, which is sort of about where where is the line of propriety when considering politics in making economic policy. And I’ve been thinking about this since last year, which is, you know, the Fed sets interest rate policy based on mostly like non partisan political considerations. At least we hope so. [laughter] On the other hand. You know, starting sometime last year at the very latest on Election Day, it seemed pretty clear Republicans were going to take over the House and then they were going to immediately start threatening to send the country into default by not increasing the debt limit unless they got, you know, whatever policy concessions they they intend on demanding. If you you have to be sort of an idiot to not know that that’s coming. If you’re someone like Jay Powell, who is is aware of what happens in Congress would be appropriate for Powell and other people on the Fed to not play dumb and to, for instance, like limit interest rate increases in anticipation that Republicans intend to threaten at least to destroy demand all on their own, using their usual sort of legislative terrorism tools. 


Dean Baker: It gets a little hard because, you know, the question is would let’s say he has a fair degree of confidence that it will be up against the wall come, I don’t know what the drop dead date is, I think it’s sometime in June that they’re talking about where we literally can’t make our payments. It is hard for him to first off, it’s hard to say what he should do. Let’s say he knew that. So what? What would you do? It’s not clear to me what’s appropriate. I mean, people have debated. I’m sure you’ve heard this. Could Biden just say, look, the 14th Amendment says the debt’s not— I was actually struck. I’m sure you’ve seen some of this. I realize I’m going to confess my ignorance of [indistinct] of the 14th Amendment, but I didn’t realize it was very explicitly in there. Why did they decide to have this amendment? Well, it’s very explicitly in there because they were worried that the Confederates or former Confederates would get control of Congress and they might say we’re defaulting on the debt. And that was why they put it in there, because they defaulted on the Confederate’s debt. So it was like, you know, we’re going to do that, you know, tit for tat. So it actually was put in for that reason. So maybe Biden will just say that again, I have no idea what, you know, God could come down and tell us what the Constitution really allows. I can’t answer. What will the Supreme Court say, which is probably a more important question. I sure as hell can’t answer that. But you know, what should Powell do? I, it’s very hard to say. I mean, he did emphasize the importance of paying the debt. He hasn’t put all his cards on the table. Maybe that’s the right thing, because Biden, of course, hasn’t put all his cards on the table either. So so he has to be forward looking. But I don’t know what concretely. I mean, if I were in his shoes, in other words, what would I say? Okay, we know the Republicans are nuts here. They’re trying to cause whatever chaos they can. What should we do? I don’t have a good answer to that. 


Brian Beutler: Okay, fair enough. As long as as long as it’s like there’s an out there. I mean, I feel like. Like I wouldn’t know what the right thing to do is either. But I’m not an economist in my sense is that the Fed just doesn’t think about these things. But like we’re in this period where Republicans just do this every time they control at least one House of Congress and the president is a Democrat. And at some point, I feel like we need to just embed in our modeling and in our policy making some hedges against what we know that they do. Until, you know, hopefully we reach a like a—


Dean Baker: A stable Republican Party. 


Brian Beutler: Yeah, and they stopped doing it, but. But I mean, we’re not there yet. All right, So we. I won’t fault Powell here for for not sort of hedging against Republican Republicans, monkeying around with the debt limit. But should. Should the SVB failure give the Fed pause about further rate hikes? Am I wrong that this all seems a bit schizophrenic like Powell, he wants to reduce demand, so he raises interest rates. But then the interest rate hikes bring this bank down, which in theory should reduce demand. But then he wants to bail them out, which maintains demand. And now he’s going to repeat that whole process. I mean, it seems at some point like he should pick. One or the other, right? 


Dean Baker: Well, one of the issues that goes with the big, you know, set of rate hikes like he’s put in place is financial stability. So the specifics when you have Silicon Valley Bank. I don’t know if anyone could have predicted that, but then you’d have financial problems. That was predictable. And presumably they had that on their radar screen as something that could happen. Now, what does he do about it? Well, we’ll see what they’re doing with rates now, literally now. My hope I mean, I thought he had gone way too too fast, not even considering the financial, I should say, not concerning, but was my main concern. I thought it’d gone way too fast with the rate hikes as he had it. And I also think that they’ve done most of what they need to do by their target, their 2% inflation target. So my hope would be that he’ll sit back and go, okay, let’s just wait. You know, let’s see the fallout here and get more data. I mean, again, I my I was struck by the fact wage growth is basically at a non-inflationary pace. So I’m kind of putting a lot of weight on that in the sense that if wages are growing particularly fast, unless you have a story where you don’t have just a one time shift from wages to profits, but an ongoing shift which we’ve really not seen, then you don’t have to work. So, you know, wage growth can accelerate. That could happen, which is given the data we have now with wage growth, it’s slow to the point that’s inflationary. I would hope Powell would say, okay, we could sit back and wait. Let’s see more debt. 


Brian Beutler: Got it. Okay, that makes sense. So I think over the course of the last hour or so, you’ve said that, you know, in an ideal world, you would have liked to see Biden go on TV, give these Silicon Valley jerks a tongue lashing, not bail them out, but that he was in a tough spot. And there was probably they they succeeded in persuading the policymakers that there would possibly be a mass run on banks if they didn’t bailout SVB so they had no choice. Now we’re in this weird world where they did the bailout, but there’s probably no political will under the current alignment in Congress to to pass regulation, to reduce or eliminate the moral hazard of the SVB bailout. So with all that together, assuming that I characterized your your view of the thing correctly. And assuming this is all kind of in the rear view, was this a big deal that we just lived through or something that we’ll look back on as a blip? 


Dean Baker: I’m expecting a blip. 


Brian Beutler: Okay. 


Dean Baker: I think this was hugely blown out of proportion. And, you know, the comparisons to 2008, 2009 were just crazy. The banks really were insolvent. They held trillions of dollars in mortgages. They had lost much, in some cases, all their value. They really weren’t solvent, this was a poorly managed bank, mid-sized, not by any means, the biggest. And again, it could have easily without the fireworks could’ve easily been resolved. You’ve had some people unhappy because they didn’t get 100%. They got 85, 90, 95%. Going to be a lot of fallout. But it really was overplayed enormously. 


Brian Beutler: All right, well, look, I’ll take blips over huge catastrophes that we regret quickly in hindsight. Dean Baker, thanks for spending so much of your time with us this week. 


Dean Baker: Thanks a lot for having me on. [music plays]


Brian Beutler: I think Dean and I got to the nub of it at the end just now. It really sucks that this group of bad, greedy people got one over on the rest of us. But they did. As true as it might be in theory, that letting SVB fail the old fashioned way wouldn’t have endangered the broader economy. Theory doesn’t account for unethical behavior, like threatening to whip up a broader bank panic if you aren’t given a bailout. And as satisfying as it is to imagine Biden going on TV and reading a bunch of greedy venture capitalists, the Riot Act, they had the tools they needed to extort the government and they used them and it worked. So, yes, that just feels terrible. It’s like having your face rubbed in how there’s a set of rules for regular people and impunity for the super rich. On the other hand, it also seems like A, the Biden administration had little choice but to cave here. So that part of it really isn’t a government corruption story. And B, we’re probably going to look back on this as much ado about very little. That’s what Dean thinks, anyhow. And he’s a really independent minded expert. If he thought Biden had really blown it here or that we were on the brink of catastrophe, he would have said so. And as much as it might have felt over the past couple of weeks, like we were slipping back into the bad old days of 2008, that really doesn’t seem to be the case. And that at least, is something to be grateful for. [music plays] Positively Dreadful is a Crooked Media production. Our executive producer is Michael Martinez, our producer is Olivia Martinez and our associate producer is Emma Illick-Frank. Evan Sutton mixes and edits the show each week. Our theme music is Vasilis Fotopoulos.